Closing the Seed Philly Incubator & the future of our organization

Since becoming involved in the Philadelphia tech startup scene nearly a decade ago, it’s been my passion to make this region a better place in which to start a company. Over the years, I’ve worked with many great people who’ve shared in that vision. Guided by an all volunteer team, Seed Philly has helped hundreds of entrepreneurs start incredible companies – entrepreneurs who collectively contributed towards the creation of over 500 new jobs and raised tens of millions of investment dollars, adding immensely to our local economy. Therefore, it’s with a heavy heart that I write to tell you that Seed Philly’s incubator at 1650 Arch Street, will be closing at the end of this month.

Our building recently sold. The new owner notified us that they are exercising their right to terminate our lease. We are not alone. The remaining 10 tenants left over from Good Company Group’s incubator that occupied the space next to Seed Philly have also lost their lease. Thankfully, a number of companies across town have offered temporary space for any Seed Philly tenants in need of a home while they search for a new location, and we’re working with each tenant to help in the transition.

Our struggle toward building a stronger ecosystem is a larger problem than Seed Philly closing. Seed Philly has been part of the solution by connecting our distributed community; however, real stickiness only comes from a larger group effort. It’s time to take the Philadelphia startup community to the next level – one that unifies all of the great things happening in the region to make our community competitive on a national level. Our ecosystem has the tools necessary to be competitive – abundant talent, people willing to be thought leaders, active and passionate entrepreneurs and technologists, individual and corporate wealth, etc… Unfortunately, we haven’t been able to cement the bonds that connect each of these pieces together, and our lack of a unified critical mass has rendered the Philadelphia region a difficult place to start a company. I’m confident that, with the right catalyst, we can come together and make Philly a leader on a national scale.

As for Seed Philly, my hope is to keep our non-profit entity alive, to serve as the gateway to our tech startup and innovation community, and the glue that binds our components together. What exactly Seed Philly will transform into is still up in the air, and we welcome community feedback. Once we determine the final path, we will launch a fundraising campaign, and ask for your support.

While you think about suggestions for our future transformation, below you will find some background on our past few years and an assessment of where Seed Philly and the startup community stands today.

Thank you to all of the many volunteers and donors who helped along the way, and thank you for your continued support.

Brad DenenbergFounder/CEO, Seed Phillybrad.denenberg@seedphilly.org

Additional Thoughts

Seed Philly started in 2011 as an effort to launch a new angel investment group. In researching the need for seed stage funding and other ways to bolster the startup community, I encountered a significant number of young startups who were searching for office space where they could work side by side with other like-minded entrepreneurs. Hundreds of meetings with community members were followed by nearly two dozen focus groups, where collectively we came up with a plan to make Philadelphia’s tech startup community more accessible, competitive, and ultimately successful. As a result, Seed Philly was born: the first and only incubator and education center in Center City Philadelphia dedicated to building scalable, high tech startups.

We decided to make Seed Philly a 501c3 non-profit, realizing that the only way financially to help a critical mass of entrepreneurs – and thus attract attention and resources from investors and tech giants from outside the region – was to subsidize real estate. We knew that our future tenants would never be able to afford market rates for office space, and subsidized real estate for the sake of economic development was not a for-profit business model that made financial sense.

Beyond just real estate, we believed that our true value lived in our collective network. Our research indicated that the most significant factors for the more than 70 companies that had recently departed Philadelphia for other cities was either the lack of a community of entrepreneurs, the lack of access to capital and other resources, and often the lack of affordable space. We believed that having a space large enough to house 25 companies would help solve those problems, and the success of our space and related programming would quickly prove to be a valuable validation of our hypothesis. The goal was to test our theory that the benefits associated with clustering would lead to faster and more efficient growth, and then to expand to a space large enough to make a significant impact.

We found an amazing partner in Behringer Harvard, who generously agreed to rent Seed Philly space for just half of their operating expenses. We hypothesized, and Behringer Harvard agreed, that if our startups became successful, that the building owners would benefit in the long run. Now we were able to sublease a space to startups at a price they could afford- something that did not exist anywhere else in Philadelphia at the time. We quickly opened with 6000 square feet – space for about 60 people. Good Company Ventures took the adjoining 6000 square feet, and we shared resources. 22 companies launched from Seed Philly within the first 3 months, as did roughly 20 others at Good Company. As a result, within days of our opening, both Microsoft and Google started courses at Seed Philly.

Shortly after Seed Philly opened, Venturef0rth emerged with a similar startup incubation focus, and outside interest in Philadelphia startups increased even more thanks to the great mentorship of their three founders. DreamIt expanded, attracting more attention, and partners like Independence Blue Cross, Comcast and Penn Medicine invested and engaged in the community. The Science Center opened Quorum, which quickly became the go-to meeting spot in the community. NextFab created a one of a kind makerspace and remains a national leader. The momentum clearly shifted, and Philadelphia began to grow our community faster than most other secondary tech hubs.

The tech giants like Google, Amazon and Microsoft began to take notice of Philadelphia entrepreneurs. Google opened a small new office in Philadelphia, and Microsoft flew in staff 3 times a month to support local startups. Venture funds from New York, Boston and Silicon Valley reached out in search of deal flow. Locally, the City of Philadelphia finally became involved in our community, launching a small fund with First Round Capital, the top tier venture fund that had recently been lured to West Philadelphia from the suburbs after a change in the city tax code.

Since our opening, nearly 130 tech startups have called Seed Philly home, and countless thousands of others have passed through our doors. Over 500 brand new jobs have been created by tenant companies, and combined, our companies have raised over $40 million dollars. Of the roughly 50% of companies that started here and failed (compared to a national average above 90%), we helped place around 75 people at new jobs within the local tech community, some within a few days of closing their startup. We’ve taken pride in teaching entrepreneurs how to validate their business models, and that failing is just a learning experience. We often say “fail fast, and fail cheap”, and along the way, hopefully we create better technologists and business people that add value to our ecosystem.

The Seed Philly incubator was originally designed just for tech startups, to ensure that entrepreneurs and technologists working on similar projects were always available to help each other. Over the years we made a few exceptions and allowed teams from more advanced companies to rent space, contingent upon them being active community members. As a result, Uber launched their Philadelphia operation from our office, Ericsson started an internal innovation team (which has led to a permanent office in Philadelphia), and StubHub launched their internal analytics platform from Seed Philly.

Since 2011, we’ve established strategic partnerships with over 50 public tech companies, enabling startups to have a direct path into Samsung, Microsoft, Amazon, Adobe and countless others. We’ve coordinated over 800 one-on-one meetings between area entrepreneurs and our partners, including investors from over 40 funds and dozens of angels. We’ve established strong relationships with the local press, as well as national players like Forbes and TechCrunch, enabling countless articles on behalf of local entrepreneurs. This business development help has been provided to entrepreneurs regardless of where they do or do not pay rent – from Penn, Temple, Drexel and other schools, to every one of the other workspaces in the region. The vast majority of the startup companies within our community have been engaged with Seed Philly in one way or another.

When the organizer of the tech meetup moved to New York, we started Philly New Tech Meetup to fill the void, recognizing that in most every major city in the country, the tech meetup was the first stop for anyone new. Eighteen months and 2,600 members later, we have the largest monthly event in the region, and Meetup.com recently informed us that PNTM is the fastest growing and best attended of all tech meetups in the country (attendee to member ratio). As a result, the founders of Mobile Monday Mid Atlantic have asked the PNTM organizers to resurrect Mobile Monday – an announcement we made public at our joint event on September 21st in front of a sellout crowd of 250 people. Now the reach of PNTM will extend further into the enterprise community, and make the combined organization by far the largest in the region.

In the long run, not all of the changes in our community over the past few years have ended up being for the better. The oversupply of cheap office space has decreased the value of clustering, limiting the ability to incubate and creating a difficult landscape for local entrepreneurs and outside resource partners to navigate.

We entered the market at a time where regional commercial real estate vacancies were above 15 percent. With cheap and abundant space available, 28 new shared office spaces – coworking, incubators and accelerators – opened within 8 months of Seed Philly starting, and a race to put warm bodies in the seats began all across town. These spaces came and went, causing mass confusion among the tech giants and investors, as entrepreneurs played a game of musical chairs to take advantage of free desks at competing spaces. Google soon moved their marketing and development teams out of Philadelphia, and Microsoft stopped holding classes here, choosing instead to focus their Northeast team’s efforts on New York and Boston.

As our shared office spaces have cannibalized each other, it became impossible to achieve the size and scale necessary for the economics to work. Educational classes and networking events overlapped, both on the calendar and in content, and the classes of value became increasingly fewer. Quickly, the rarity of the microbrew became the key selling point at many spaces and events across town, making a mockery of why we were holding these events in the first place – education and engagement, not entertainment and alcohol.

General Assembly came in from New York, offered months of free classes to kill off competition, and then suddenly began to charge New York prices. The problem was that our community had become accustomed to free, and the well had been poisoned. General Assembly vanished overnight, and no organization has been able to successfully hold tech education since. Similarly, maker-space 3rd Ward entered our market from Brooklyn, but abruptly vanished when a paying community didn’t materialize.

Just like desk space and tech classes, speakers and networking events drifted toward free as a last gasp effort to attract people through the door. The number of tech related meetups in town swelled to over 275, demonstrating a strong support network for technologists eager to learn. Unfortunately, nearly all operate without any legal entity, making it difficult to grow into spaces that require insurance and contracts. As these groups operate on little or no budget, they have been relegated to bouncing between free coworking spaces, and we’re now seeing once thriving groups lose momentum as the larger spaces host their own competing events to draw foot traffic.

Cities like Chicago and Washington DC have blossomed, with their immense non-profit incubators 1871 and 1776 respectively, and our entrepreneurs are now leaving Philadelphia for secondary markets instead of just New York and the Valley. In both incubators, one can find literally hundreds of companies together under one roof, with a constant parade of investors, tech CEOs and political dignitaries coming through the office. Access to resources are plenty, as companies like Google, Facebook, Microsoft and Amazon have either opened offices directly next door or placed employees within the incubator spaces. Both spaces started with significant investments from local government – something our local government has opted not to do.

Today, I know many who would say that it is difficult to quantify the progress the Philadelphia tech ecosystem has made in recent years, because we would be hard pressed to find an accurate reporting of the facts in the public record. Unlike other cities that have leap-frogged Philadelphia, we have no centralized directory, no single space that keeps data on a critical mass of entrepreneurs, and next to no seed stage risk capital being invested. Companies continue to move away every day, not just to New York, but to Austin, Washington DC, Boston, and other cities, to seek funding and partnership opportunities not available here.

For one example that adds insult to injury, a panel of investors spoke at last October’s IMPACT conference – each from prominent venture funds in New York, Boston, DC and Silicon Valley. They spoke of the amazing talent emanating from Philadelphia, though none of them had invested locally in nearly a decade. Why? Because they didn’t need to. The investor from New York said that the majority of the investments his firm had made in New York City were into companies whose founder had moved from Philadelphia (and had often attended Penn).

All is not lost. Philadelphia is at a tipping point and collectively we have the ability to turn this situation around. We have 99% of what is needed to have a thriving community that rivals most any city, we just lack to the glue to hold it together. No one expects us to compete with New York or Silicon Valley, but we do have the ability to attract new companies and retain those that start here. For those outside of this region, I’d challenge you to find a better place that balances a strong metropolitan community, cost of living, quality of life, and convenience to hub cities like we have here in the Philadelphia metropolitan area.

Our 101 colleges and universities are pumping out incredibly talented people, but many of those people are continuing to leave for greener pastures. Why? Because we’re failing at connecting those talented people to the rest of our community. Penn attracts the best and brightest from around the world, and we’ve seen incredible companies come through the Wharton VIP Program, Business Plan Competition and UPStart (now PCI). Drexel’s new Close School of Entrepreneurship and Baiada Center are garnering great praise, as are Temple’s Apps and Maps Program and Philadelphia University’s Blackstone Launchpad program, just to name a few. Unfortunately, our universities still often operate in silos, and their students have little to no interaction with the rest of our tech community. Furthermore, when those universities bring high profile speakers and investors through campus, access to the outside community is limited at best. A simple commitment to open engagement can easily make a giant impact.

We also have an incredible amount of senior brain power in the region. Having companies like Comcast, Campbell’s, Urban Outfitters, Dow, SAP, Unisys, and most of Big Pharma in our back yard should yield an amazing opportunity to tap into a wealth of knowledge and capital, yet our disparate silos across the community make it difficult for corporations to get engaged and build a culture that supports innovation. Corporate engagement with startups can lead to super fast and heavily discounted R&D for the corporation, provide in-depth knowledge of upcoming technology trends, and act as the front line for hiring. At the same time, startups get a valuable leg up, access to a partner to validate and guide their solution to a true industry problem, and potentially, a strategic partner to drive further investment.

Our region is rich with successful business people willing to invest both their time and money, yet our city/suburb divide makes cross-generational interaction difficult. An outreach effort to educate future mentors and investors could bolster a new generation of startups.

Finally, we need to pay close attention to the recent influx of capital from New York and the West Coast. Outside investors are coming to Philadelphia seeking an arbitrage opportunity, and Seed Philly is regularly asked by venture capital firms from outside the region to scout deal flow – not just to suggest with which companies to meet, but to actually set up full days of meetings with promising startups before the investors deem a trip worthy; clear evidence that we are lacking an initial access point in the entrepreneurial community where real data on our startups can be found.

A worst case scenario is that Philadelphia provides discounted deal flow relative to larger startup markets, and investors force the hands of their new portfolio companies to move to larger tech hubs as they grow. We cannot and should not stop these investors from coming. Instead, while we have the outside investors here, let’s make sure they know about all of the other great companies in the region and encourage them to double down on our startup scene. Then, as we grow into a stronger ecosystem, the need to move to larger hubs will diminish.

Since the founding of this great city, Philadelphia has been hugely successful in launching game changing ideas and getting them off the ground. Our concept/idea stage community is thriving with groups like Philly Startup Leaders, and Penn Apps, but now we need to focus getting our startups past the idea phase and into real growth. This growth demands high level education, cross generational mentoring and networking, and access to investors and corporate partners.

As we continue to research what works and where our efforts are needed, we will publish initiatives that can continue to add to the work that we’ve done over the past few years. There is a lot to be done in the next phase of strengthening our tech community to become nationally competitive.

To a minor degree, the initial space issues have been addressed by the for-profit market, but the resulting lack of incubation and business development services is now adding to our current market confusion. This fall, 8 spaces around the city have closed or are winding down operations, and another 5 or 6 are planning to open in the next 6 months, further adding to the chaos. As groups like WeWork enter our market, that dynamic will to continue to change. While Seed Philly served its purpose as a successful test balloon, validating Philadelphia’s need for a centralized incubation space, economic factors limited our ability to compete at scale.

Everyone knows where to find diamonds, retail and restaurants in Philadelphia, but where do technology companies go? And how do companies, people and investors find them? Other cities successfully compete by clustering their technology companies with support of public/private partnerships. Chicago, D.C., Boulder, Austin, Pittsburgh and even Cincinnati, Ohio have demonstrated that clustering is just one of the key components necessary for a strong ecosystem – possibly the most important – but there are also other community driven factors that come into play.

Seed Philly’s next step will be to serve as a virtual gateway to our ecosystem and tie our community together- to break down fences between our city startup community and the rest of the world. PNTM will continue uninterrupted. This is only the start of a whole new chapter for Seed Philly, and despite my candid perspectives on what’s working and what’s not, I’m as energized and positive as I’ve ever been on our tech community.

To succeed we will need to re-double our efforts in making outside connections and focus on becoming the central point of contact for future partners. To make those relationships flourish, we’ll need everyone’s cooperation to obtain accurate data to back our case. Thank you in advance for your input in continuing to make our region a better place to build a business.